It seems like such an easy question. I own a business – can I deduct this?
I’ll tell you why it’s so hard for your accountant to answer this question.
It’s like someone asking, “How fast can I drive on the freeway?” If they are asking how fast their car can actually go – that might be 200 miles per hour. If they are asking about the legal speed limit – that might be 65 miles per hour. But what they are probably asking is how fast they can drive without getting a speeding ticket.
That is a much tougher question.
Because I will tell you right now – you can deduct anything you want, just like you can drive as fast as you want.
Until you get caught.
The expenses you can safely deduct when you travel depend on three factors: the purpose of the trip, how long you were gone, and the type of expenses you had.
What was the purpose of the trip?
This seems obvious – but the trip has to be related to your business to be deductible. So a client meeting or a conference is pretty straight-forward. But what if you took a vacation to New York, and stopped in to see a potential client while you were there? Any expenses you had while meeting with the prospect are probably deductible – the cab ride to get to their office, the lunch you ate with them. But not the cost of your hotel room for the whole week. And definitely not the cost for tickets to fly your whole family out.
For the most part, if your trip is 100% business-related, then all of your expenses on the trip are deductible. If the trip is a mix of business and pleasure, you will have to allocate the business-related costs and personal costs. That isn’t always easy or straight-forward, but to stay in the gray area, you need to be able to justify how you categorized the purpose of an expense.
How long were you gone?
There might be times when you leave for a business trip in the morning and return before the day is over. Technically, this doesn’t fall under the category of “travel” for IRS purposes. For that, you need to be away from home overnight.
Why does it matter?
If you are away from home overnight, you are allowed to deduct your meals (the ones you eat by yourself) and other travel incidentals (that toothpaste you forgot to bring). But if you aren’t away from home overnight, you can only deduct your transportation costs and the direct business-related costs. So, if you eat lunch with a client on a day-trip, it is deductible. If you eat lunch by yourself while driving home from a client meeting – don’t deduct it, or you’re headed out of the gray area and into risky territory.
What expenses did you have?
Any travel will typically have transportation costs (flights, trains, auto mileage), hotel rooms, and meals. These are all deductible (the meals are subject to the same 50% limitation as all business meals). You might have other incidental costs, such as tips, dry cleaning, or the aforementioned toothpaste. These are also deductible (as long as they don’t venture into the realm of exorbitant).
But usually, if something isn’t deductible when you buy it at home, it isn’t deductible when you buy it on a trip. So no deduction for that new suit you bought or the Broadway show.
The answer to the question, “What can I deduct for my business?” can be complicated. However, following the tips in these three categories will help you more easily determine what exactly you can deduct.
If you’ve got a question regarding deductions that we haven’t answered here, go ahead and send us a message. We’re here to help you navigate the gray area and get the most out of your business deductions.